An asset is basically any item with economic value that can be converted into cash. Assets are just resources and they can act as a storage of your wealth, reduce your future expenses or act as a source of income. Assets may range from cars, land, stocks, savings to homes. The three MAIN reasons why you should look forward to acquiring some assets are;
- They store your wealth
- They can generate income
- They reduce your expenses
1. Assets store wealth
Let us say you bought a twenty acre piece of farmland with your extra cash because you didn’t have better use of your money at that particular time. But after 3 years, you need cash so you sell your piece of farmland at a higher price than you bought it.
This is an example in which your asset stores your wealth. But in instances like the example above your asset will not only store your wealth but it will also increase it. When your asset is sold at a higher price than it was bought we say you have earned a capital gain. But in instances where the opposite happens (you sell your asset at a lower price than you bought it) we say you have earned a capital loss. In acquiring your asset you should strive to earn a capital gain. Make sure that in the process of acquiring your asset you are sure that in addition to storing your wealth your asset earns you a capital gain.
2. Assets create a source of income
In addition to storing wealth, some assets also create a source of income. A few instances in which assets act as a storage of wealth and also generating some income include ;
- An investment in an apartment house stores wealth and also creates income in the form of rent.
- An investment in a share of stock stores wealth and also creates income in the form of dividends. If you want this asset to increase in value you may decide to reinvest it back into the company. This way the company will increase its value. An increase in the company’s value will see an increase in your stock and hence an increase in your wealth.
- Depositing your cash in a savings account also stores your wealth and also creates a source of income in the form of interest.
Above are just a few examples of how your assets may act as a source of income on top of being a storage of wealth but there are many more options.
3. Assets reduce your expenses
An asset can be used to reduce your expenses. In some cases however, an asset may store wealth and also reduce future expenses. For example, buying a house may be cheaper in the long run than renting one. When you decide to sell the house when the demand is high, the value of the house will have appreciated and hence you will realise a gain. This way the house will have acted as a storage of wealth in addition to reducing your expenses.
In some cases an asset’s sole purpose may be to reduce your expenses and nothing more. For example, owning a car to drive to work proves to be cheaper in the long run than using public transportation or renting one to go to work. In this case however, the value of the car will depreciate over time so we cannot say it stored our wealth but it served its purpose which was to reduce our future expenses.
If you have some cash that you have not figured out any proper use to put it into yet, you can consider the above three reasons as to why you should acquire an asset and try to acquire one ASAP!